Post on 21-Jul-2016
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The $tock Market
Halal or HaramIn theory & practice
Sourah Al-Baqara, ayah 27:Those who break the covenant of
Allah after ratifying it, and sever that which Allah ordered to be joined,and (who) make mischief in the earth:
Those are they who are the losers.
The concept of a market• A market is a place where
buyers & sellers exchange goods/service in exchange for money
• Markets existed at the time of the prophet
• There is no issue on the concept of markets
The concept of stock marketThis is a specialized market where the
ownership of companies is bought & sold
Ownership in sold in the form of shares, which have prices attached
The share price determines the over all price of the company
Such a specialized market did not exist at the time of the prophet, but there is nothing un-Islamic about the idea
Qiyas: Like a specialized market where animals are bought & sold
The basic concept – how is profit/loss distributed
• Dividend
• Increase in stock price –reflects profit
• Decrease in stock price – reflects loss
• The concept of profit & loss is reflected in the change in stock price, in line with Islamic principles
Dividend ExampleStock price: Rps 100
# of outstanding shares: 1,000
Profit earned: Rps 1,000
100% distributed to share holders (Dividend)
Rps 1000/1000 shares= Rps 1 per share
Islamically acceptable
Profit Example – Increase in stock price
Stock price: Rps 100# of outstanding shares: 1,000Profit earned: Rps 1,000No dividend: 0% distributed to
share holdersRps 1000/1000 shares= Rps 1 per
share increaseNew stock price = Rps 100
+ 1 = 101Islamically acceptable
Loss Example – Decrease in stock price
Stock price: Rps 100# of outstanding shares: 1,000Loss suffered: Rps 1,000No dividend: 0% distributed to
share holdersRps 1000/1000 shares= Rps 1 per
share decreaseNew stock price = Rps 100 -
1 = 99Islamically acceptable
The stock market – in theory
• Thus, in principle the idea of a stock market is Islamically acceptable
• Ulema issue FATWA on the basis of information provided; thus, Ulema say that stock market trading is halal
• Ulema put a few valid Islamic restrictions
Stock Market Restrictions
• Avoid companies which have unislamic products, such a (interest) banks, alcohol, pig products
• Avoid companies that produce goods to harm Muslims, Lockheed, General Dynamics
• Avoid companies that aid the enemies of Islam, Coke, McDonalds
• Prefer Muslim companies; avoid non-muslim companies ?
Stock Market Ulema Restrictions
• Short selling – Haram• Futures trading – Gambling• Futures short selling – Haram• Avoid day trading – keep min 4 days• Margin trading involves interest – Haram• Speculation trading is the same as gambling
The stock market in practice
The stock market operates very differently in practice!
There are elements of: • Gharar (uncertainty) • Maisir (gambling), betting, speculation• Riba (interest)• Qimar(one parties loss is another’s gain)• Kazab (lying, and misleading)
Example of Riba• Listing of banks & interest
based financial institution
• Solution: Don’t deal with them!
Changes in stock price – more than profit/loss
• Expectations & rumors• Future expectations more
important than current realities• Big investors have great influence
& control• News• P/E value plays a major role –
generally over inflated valuation• A company may earn a profit, and
the price may go down!• Expectation & speculation
KSE-Controlled by big fish ?
The “big fish” (BF) toy with KSE• AKD• Jahangir Sadiqque• Arif Habib
The stock market gameMonth KSE Siemens ActivityJan 2006 8,000 1,000 BF begin gameFeb 2006 9,000 1,100 BuyingMarch 2006 10,000 1,200 BuyingApril 2006 11,000 1,400 BuyingMay 2006 12,000 1,500 BuyingJune 2006 13,000 1,700 SellingJuly 2006 14,000 1,800 SellingAugust 2006 16,000 2,000 SellingNo more momentum, and the market begin to
decline!Now it’s a BEAR market!Price increase is not because of company
profitability!
Intention of buying• Not buying because of the profitability of companies• Only because the market is going up & up-
speculation (bull)• The analysts of the Big Fish cautiously create a
fervor, & mislead the Small Fish – (Engineering QIMAR!!!)
• Gambler’s instinct at work!• The Big Fish make their money, at the expense of
the Smaller Fish – Qimar• The Big Fish safely exit the market, at the expense
of the Small Fish (bursting of bubble – market crash !)
• Those trading on margin are wiped out !• Qimar,Maisir, Kazab, Riba & Gharar ALL present in
practice!
Big Fish expert planning & control
Month KSESiemens ActivityAugust 2006 16,000 2,000 Selling futures optionsSept 2006 14,000 1,800 Selling futures optionsOct 2006 12,000 1,600 Selling future optionsNov 2006 10,000 1,400 Selling future optionsDec 2006 8,000 1,200 Selling future optionsJan 2007 7,500 1,100 BuyingFeb 2007 7,000 1,000 BuyingMarch 2007 6,500 900Buying
The Big fish eat all the small fish,& are preparing for round 2!
Now it’s a BULL market!
The stock market game PROOF -yearly
The Stock market – daily game
Difference between theory & practice
• In theory Hindus eat vegetables only.• But in practice they eat meat.• Should we eat the food of Hindus
(prepare & slaughtered by them)?• In theory the people of country X (who
are non-Muslims) do not have a prejudice against Muslims.
• In practice the people of country X strive to persecute Muslims.
• Should we migrate to country X ?
Now Ask the Ulema• There is an 80% chance that the market
will go up tomorrow; can I buy any share such as Bosicor or Maple Cement ?
• There is a rumor that Jahangir Sadiq will buy 1 million shares of Attock Refinery, shouldn’t I buy this stock immediately?
• Because the market goes up 100 points every day, there is a 70% chance that it will go up tommorrow as well, but my gut feeling is that it will not (my gut feeling correct 80% of the time); should I buy shares today (before market closes) ?
• Profit are announced every 3 months, but the price changes every minute ?
Important noteUlema give FATWA on the data
given to them!
Assignment:Explain the practice of the stock
market to any Alim, & get his FATWA!
Is the stock market Halal or Haram ?
The Islamicly acceptable stock market
Should be free of all haram things, such as:• Riba• Gharar• Kazab• Maisar• QimarThe resultant stock market would be very
different;Those people who are addicted to & enjoy the
sinful stock market, will find it to be unadventurous & manipulative!
The Islamicly acceptable stock market
The resultant stock market would be very different from what we see today, & sinful people would not find it attractive or enjoyable, because it would be:
• Stable; free of erratic volatility• Price change would be a function of profit, & would
normally change on quarterly basis, as apposed to erratic volatility by the second
• It would be based on actual valuation rather that speculation
• Real valuation would ensure from stock market crashes• Profitability and loss would be gradual• Deviant & misleading officials & companies will be
punished• Ulema encourage dividend model in conventional model• Interest group manipulation & maneuvering NOT
possible
Ordered to give good newsSourah Al-Baqarah, ayah 25:
And convey good news to those who believe and do good deeds,
that they shall have gardens in which rivers flow; whenever they shall be given a portion of the fruit
thereof, they shall say:
This is what was given to us before; and they shall be given the like of it, and they shall have pure mates in them,
and in them, they shall abide.